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Investor sentiment and the financial crisis: a sentiment-based portfolio theory perspective

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  • Jun Xie
  • Chunpeng Yang

Abstract

The article proposes a portfolio model subjected to a constraint that captures the investor's goal, with maximum estimation of expected return that is affected by investor sentiment. And we give a solution of the portfolio model by exploring the geometric features. Furthermore, we discuss the relationship between investor sentiment and the financial crisis by analysing the optimal allocation. The results show that: when investor sentiment is low enough, the investor should reject the investment, this condition leads the depression financial market to prevail, then the financial crisis erupts; when investor sentiment is modest, the financial crisis is difficult to erupt unless the decline of investor sentiment is quick and deep; but there is a special status that the financial crisis is caused by other factors rather than by investor sentiment; and only improving investor sentiment cannot move away from the financial crisis.

Suggested Citation

  • Jun Xie & Chunpeng Yang, 2015. "Investor sentiment and the financial crisis: a sentiment-based portfolio theory perspective," Applied Economics, Taylor & Francis Journals, vol. 47(7), pages 700-709, February.
    • Handle: RePEc:taf:applec:v:47:y:2015:i:7:p:700-709
    DOI: 10.1080/00036846.2014.978078
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    Cited by:

    1. Yadav Devi Prasad Behera & Sudhansu Sekhar Nanda & Shibani Sharma & Tushar Ranjan Sahoo, 2022. "Examining Risk Absorption Capacity as a Mediating Factor in the Relationship between Cognition and Neuroplasticity in Investors in Investment Decision Making," IJFS, MDPI, vol. 10(1), pages 1-16, March.

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